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How’s this for a worst case scenario?

An independent sales representative who was the founder of the agency works long and hard for years to attract, grow and keep profitable lines. He succeeds through the lean and fat times and builds a reputation for professionalism on a foundation of solid relationships with his customers and principals. Then the day comes when he decides to leave the business, but:

• To whom does he leave the thriving business?
• If he’s the one responsible for those solid business relationships, what happens to them when he’s gone?
• How does he get any value out of the business to provide for him and his family in retirement?
• What about the tax and financial implications?
• And, what about siblings and other family members?

Will they be — or do they want to be — involved in the future operation of the business?

These and other questions are ones best asked long before the sales representative arrives at that point in his life when he’s contemplating life after the agency or retirement. That’s why, as advised by one agent, the subject of succession planning for the independent manufacturers’ representative should be a part of his daily business conversation.

A Daily Conversation

That daily conversation has been conducted by Alan Lupton, president of Lupton Associates, Rochester, New York, an independent sales representative who’s obviously a strong advocate for succession planning — not only for himself and his business, but for others as well. Lupton leads his company’s sales, marketing and business development efforts. In 2003 he purchased Lupton Associates from his father, Al Lupton Sr. Since 1998, he has traveled with Lupton’s sales team in all territories providing management oversight, supporting the development of strategic accounts, assisting with program management, coaching, marketing and business development in all areas

According to Lupton, “There are a lot of reps out there who love what they’re doing and maintain that they want to do it to the day they die. Here’s the problem, if you do it ‘til the day you die, you can’t get your value out of the business. If you own the business until the day you die, with no planning, that value dies with you. Hence, the need for succession planning.”

And plan is exactly what Lupton and his father did. “If there’s one thing I learned from my dad, it is the importance of planning,” he says. “My dad always took the approach to planning that is similar to making wine — make no decision before its time. That’s what we did together. Sure, it was difficult for him to sell his life’s work, but with planning, it was done successfully.”

The Danger of No Plan

Obviously working with 20/20 hindsight, Lupton says there’s a real danger for the independent manufacturers’ representative in working without a succession plan. “What happens when that day comes and the owner decides to leave the business? Inevitably your principals are going to ask, ‘What happens now?’ What results is that you’re telegraphing people that your agency is at risk because you haven’t planned for the future.

“Here’s another example of what I’m talking about. Right now, I’m talking to a rep who is in his 70s. He’s let me know that he doesn’t feel the time is right for him to plan for the future. Viewing this from the outside, I’m asking, ‘Who is this guy talking to, himself?’ Isn’t it a little bit like going to the doctor who tells you that you’re putting yourself at risk by what you’re doing? It’s the same thing with your business — you’re putting it at risk.”

Planning is another way of investing in your business, Lupton maintains. “Failure to look at the future sends a message that you’re shortsighted. It’s a little like the mindset that accompanies milking a cow. The cow may be sick, but the shortsighted view is that I’ll take the milk now, while I can. But, wouldn’t it be wiser to invest in someone who knows how to take care of the cow? In other words, plan for the future and invest in someone who knows how to protect the agency’s earning stream.”

Posing and Answering Questions

The questions must be asked: “What to do?” “Where to go?”

Lupton is quick to answer, “As I’ve been spending the last year and half trying to identify small- to mid-sized agencies that we might acquire, I’ve been amazed at some of the answers that are offered to those questions. One of the first things that occurs to me is that not everyone really has a sense of the value of their business. Sure, they can give us a sense of forecast for the coming year and tell us about their commission stream, but not everyone really keeps good records. For anyone that might be interested in planning for the future, they’ve got to do more. There are certainly resources available in MANA, they can network with rep peers or check with principals, but an integral part of their planning certainly involves finding the right person to involve in the succession plan.”

Lupton cautions, however, that it’s important to have that “right person” in place for a period to of time in order to ensure the succession plan can be properly executed. “Sure, having that right person helps you design your succession plan, but I don’t want to buy a business from someone who is handing me the key next week. I want the support from the seller for a period of time. That’s because your relationships with principals are critical. And the transfer of lines is important. Then there’s your customers. It’s a little bit like a three-legged stool. You’ve got to be sure that the infrastructure of the agency and relationships with principals and customers are strong. If any of them are weak, chances are the succession will fail.”

Involving the Younger Generation

An agency that has crafted its succession plan to include family members is Harvey Gerstman Associates, Inc., a long-time MANA member in Garden City, Long Island.

According to Dan Gerstman, the agency’s president, a key to putting together and executing a successful succession plan grew out of effective communication between family generations. “When you have that level of communication, it allows the younger generation especially to not have to worry about what’s going to happen next. What this leads to is a frank discussion that allows a plan to become realistic and fair to all parties involved.”

Along the path to creating that succession plan, Gerstman maintains that it’s useful to consult with professionals such as accountants, estate planners and attorneys. “But I’d also say there’s benefit in networking with business peers to learn what they’ve gone through.”

When asked what errors manufacturers’ representatives ought to be wary of when it comes to succession planning, Gerstman looks to two areas in particular. “First, transferring a share of the company to a successor too quickly might be an error. Care should be taken to do that in a more gradual manner. Second, I’d caution about being sure to communicate with principals regarding internal changes related to succession. My father always did a good job if one of the children was being promoted. He was sure to communicate to principals that succession was important to us and that this was an ongoing process. You don’t have to provide all the details to principals but it’s very worthwhile that they know the ‘torch’ is being passed in an orderly fashion to the next generation.”

In a final bit of advice to other independent representatives who might not be aware of the importance of succession planning, Gerstman advises, “I would recommend that the older generation view their role as that of being temporarily in charge of ensuring that their family business is successful. If that means opening up to change or new avenues of growth that the younger generation is suggesting, so be it. In addition, I’d also recommend that the older generation err on the side of passing along shares in the business sooner than they think they might have to.”

A Worst Case Scenario

Gord Jopling has already gone through a succession plan with his father — but he’s already thinking of the future — and he recommends that others do as well.

“What if the owner of a sales agency becomes ill or is hit by a bus and can’t work? Given this worst case scenario, what does he have to show for all his hard work? At the same time, if a principal is aware that you don’t have a future ownership plan, they might be quick to seek an alternative for going to market, that is, another agency.”

Just as many other representatives, Jopling attests to the fact that putting together a succession plan can take a long time. “I’d estimate that we started our planning in 2001 and I finally purchased the agency in 2006. In reality, I sort of feel our planning began at birth, since I always wanted to work for my dad.”

When it came to putting the plan together, “I used MANA as a resource and also looked to the expertise of an attorney and an accountant familiar with such plans.”

Reasons for a Plan

From the perspective of another agent who has shown himself to be a believer in working with a succession plan, two immediate reasons come to mind for creating such a plan.

According to Brian Morgan, The Morgan Group, Markham, Ontario, Canada, “First of all, having a succession plan is the first step allowing your business to maintain and in fact grow. Second, owners of agencies are trusted partners with their manufacturer principals. The existence of such a succession plan shows your principals how serious you are about the business and communicates to them that the agency will be there in the future.”

Morgan continues that the Morgan Group has let its principals know that a succession plan is in place. “Some of those principals have been more specific than others when it comes to details, but by and large, they have all let us know that it’s important to them that there is such a plan. After all, they’re thinking of the future also.”

When asked when he and his father realized the need for succession planning, Morgan explains, “Once we reached the point where we knew we had a viable business on our hands, we knew we had better plan for the future. And that plan entailed making perfectly clear what the future business plans were and how they affected both of us.”

As the other agents interviewed for this article, Morgan and his father sought professional advice from the appropriate legal counsel, tax and financial advisers. He adds that after six or seven years of working on the succession plan, final touches are currently being applied. The fact that it has taken this long causes Morgan to advise other agents to start early on in the process. “If anything, succession planning should be an integral part of every agency business plan. Simply put, it should be part of your daily conversation. Even if it’s a family business, family members should be careful to take off their family hats and put on their business hats when having that conversation.”

MANA welcomes your comments on this article. Write to us at [email protected].

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MANA’s “Steps to Manufacturers’ Agent Professionalism” Program

MANA defines itself as the association for professional manufacturers’ representatives and those who aspire to be professional. We believe the more professionally you operate your business, the more successful you become. The greater your professionalism level, the higher the quality of principals you sign up. The higher their quality, the greater your sales and commissions.

This issue of Agency Sales magazine examines the pressing need for the independent manufacturers’ representative to plan for the future and to actively engage in the practice of succession planning.

When agents retire, they sell their businesses. They line up a potential buyer, perhaps an employee with entrepreneurial interests or perhaps a daughter or son. They know how to value the business and know where to go to create the buy/sell agreement.

Professional manufacturers’ agents request input from their “Partner in Profits” principals when they set up their succession plans. Professional manufacturers’ agents sell their business when they retire and substantially augment their retirement portfolio.

Educational Resources

Special Reports:

• Valuing the Rep Firm — How do I place a value on my firm? MANA addresses the issue from a variety of viewpoints in this nine-chapter report with inputs from accountants, attorneys, financial consultants, and industry experts. Includes case studies of actual rep firm sales. This report is an excellent companion to either of the following reports.
• The Valuation and Sale of an Entire Manufacturers’ Sales Agency by Mel Daskal and Morris Spector — This timely report contains the latest information available from the rep profession’s leading experts on the valuation and sale of an agency. It addresses valuing the rep firm from the standpoint of both buyers and sellers, selling to the family, divorce, and the Internal Revenue Service. It also addresses advance planning, mergers, acquisitions, joint ventures, competing lines, payment options, and more. This report is an excellent companion to MANA’s Valuing the Rep Firm report.
• Selling Part of Your Rep Firm to Your Employees or Partners by Mel Daskal and Morris Spector — This report addresses the issues unique to selling your rep firm to your employees or partners. It is a companion report to The Valuation and Sale of an Entire Manufacturers’ Sales Agency and Valuing the Rep Firm.

Teleforums:

• Succession Planning
• Buy, Sell and Merge Your Rep Firm

Agency Sales articles:

• “Buy-Sell Agreements”
• “Selling or Buying a Business”
• “Succession Planning: There’s No Success(ion) Without a Plan”
• “This Way Out! Strategies for Successful Exit Planning”
• “Roadway to Success: Legal Aspects of Buying or Selling a Rep Firm,” Parts I and II